Trade policy in the EU

Protect trade, or protect Sarkozy?

Funny thing, those hard-fought EU summit statements. Sometimes the most thunderous declarations mean nothing. But sometimes there are those ambiguous little words turn into something big. Such is the case with the preamble of the communique (PDF)of the summit in September 2010:

The European Council discussed how to give new momentum to the Union's external relations, taking full advantage of the opportunities provided by the Lisbon Treaty. It agreed on the need for Europe to promote its interests and values more assertively and in a spirit of reciprocity and mutual benefit.

“Reciprocity” was left undefined. But now we know what it means. The European Commission yesterday (March 21st) issued a much fought-over proposal to give itself the power to close its public-procurement markets to companies from countries deemed not to reciprocate in allowing European firms to compete for their public contracts.

The Commission insists this is not about protectionism, but about becoming an adult in the big bad world. It is about arming oneself to force others to open the door to European companies in a market that accounts for anything up to 20% of a country's GDP. It is, above all, about confronting China.

"The EU should no longer be naïve and should aim for fairness and reciprocity in world trade,” said Michel Barnier, the (French) single-market commissioner who co-sponsored the initiative with Karel De Gucht, the (Belgian) trade commissioner.

My forthcoming column this week deals with the threat of protectionism. For now, I want to delve into some of the detail, and the internal process that led to this deeply flawed proposal.

With difficulty, perhaps, one might believe the Commission's claim to be seeking greater market access if the proposal had included only Mr De Gucht's bit. After all, he is from Belgium's Liberal party and has negotiated many a trade deal. Articles 8, 9 and 10 of the text (the official version is not yet out, but a Commission release is here PDF and my copy of the text is here PDF) set out an orderly procedure for the Commission to investigate market access in other countries, seek redress through negotiation and, only at the end, impose temporary and targeted retaliatory measures. These could include excluding tenders with more than 50% of goods and services from the sinning country, or a price penalty on the offending part of the tender.

Mr Barnier's contribution to the effort, Article 6, is more worrying. It gives governments, municipalities and other local bodies the power to exclude bidders from offending countries (with permission from the Commission). This would apply to contracts above €5m (accounting for 60% of public-procurement contracts subject to EU-wide bidding) and where bids contain 50% or more goods and services from non-reciprocal countries.

This local freedom to exclude bids threatens to fragment the EU's single market that Mr Barnier is supposed to be defending. Not surprisingly, the article was the most contested by heads of cabinet on Monday, and by the commissioners themselves on Wednesday.

More alarming, the 50% rule in both procedures means that European firms that may make up the other half of bids could be penalised.

The proposal has run into opposition from the Commission's legal services. And despite several changes, the Commission's own Impact Assessment Board “could not give a positive opinion”. Of those consulted by the Commission, a substantial minority said they disagreed with any new legislation, including two-thirds of contracting entities and government bodies. The rest disagreed over what action should be taken.

Perhaps the most damning opinion came from Germany. Its response to the move, circulated privately, declares bluntly: “The proposal is unacceptable and should be rejected”. (see next post for the detail)

So to summarise: the proposal raises fears that it may spark a protectionist trade war, it endangers the single market, it raises questions about its legality, it worries those most charged with ensuring value-for-money in public contracts, it is opposed by Europe's most successful exporter and, according to the Commission's best experts, it probably will not achieve its declared objective.

So how did such a poorly conceived project get through the Commission's college, and why now? During the internal debates, many argued for the proposal to be redrafted because it was patently a mess. At least, the critics said, remove Article 6 entirely. But it stayed in, and the college was split more or less down the middle, with opponents including Cathy Ashton (the British commissioner), Cecilia Malmström (Swedish), Olli Rehn (Finnish), Stefan Füle (Czech) and, to a lesser degree, Günther Öttinger (German).

The decisive push came from José Manuel Barroso, the president of the European Commission. This a curious step for him. He is usually considered to be a liberal on economic matters, albeit not a very forceful one.

His motives may well lie across the border in France, where the presidential election campaign has at times seemed to be a contest over who could be most critical of the EU. President Nicolas Sarkozy has been beating the drum for protectionism, and for renationalising border controls in the Schengen free-travel area (his speech is here PDF). His Socialist challenger, François Hollande, wants to renegotiate the newly-agreed fragile fiscal compact to enhance fiscal discipline.

Perhaps Mr Barroso was browbeaten by the French president, or perhaps he concluded Mr Sarkozy was the lesser evil and decided to give his struggling campaign a helping hand.

It is no secret in Brussels that two men dislike each other. But at least they are from the same political “family” of centre-right parties, the European People's Party. One diplomat suggests: “The EPP connection is stronger than people imagine.”

While this blog post (and the following article explaining Germany's argument against the Commission's proposal) are very thoughtful and interesting, you have in them failed to answer one major concern that I would like to see addressed in the final column for next week's economist.

What I would like to see addressed is this: The EU has a severely limited military capability (and none of the EU level) and therefore Trade Policy during the Lisbon discussions and negotiations were in favor of projecting EU power through their great combined economic heft (access to the single market). While they have lined the road with carrots in order to encourage good economic behavior, they do not have many tools to apply heavier leverage to other trading powers with less than unimpeachable trade records (read China). As the Economist has noted recently, the EU has gotten sanction happy, but these are in response to political not economic concerns (like Iran or Belarus). It is impossible to imagine the EU applying economic sanctions on China or South Korea for trade manipulation.

How is the EU to try to even out the economic playing field and utilize its greatest asset: 500 million consumers with high disposable incomes? As much I would support a leap forward in the Doha talks, they seem to be never coming. How is the EU to ensure fair treatment (or even equal treatment) of their companies abroad? While this proposal seems ill conceived - it also seems like an honest attempt to deal with a real issue that EU leaders intended the Lisbon treaty to help deal with. I would relish some address to this concern in your final article.

Also I would love to see a future blog post or article discussing the relative strengths of the pan European "family" groups. One of the things I learned in school was that pan-European parties would never catch on. With Merkel campaigning for Sarkozy in France's election, I think addressing the issue would be timely and well worth an article, even if it might seem arcane to a casual Charlemagne reader.

I agree, EU's agro- and food-industry is among the most protected in the world. With an annual turnover in excess of €900 billion, this heavily protected sector is vivid evidence how ridiculous the commission's claim really is.

EU's exporters in the food sector benefit from the huge CAP subsidies, which makes them extremely 'competitive' not only on the EU's domestic markets but also internationally . . . and thus kills the agribusiness in many developing countries, which, normally, can't afford to subsidize their farmers.

Mr. Barroso's commission should put its own house in order first, before it starts finger-pointing at others.

How, again, goes the appropriate saying? - "Don't throw bricks when you live in a glass house."

MrRFox: "A trade war may the price that has to be paid to eliminate the severe trade imbalances"!
The EU is the one (poor) region in the world without any noteworthy raw material deposits or other natural resources.
Before you start a "trade war" make sure that the EU is 'made' self-sufficient with all its indispensable oil, gas, energy and raw material needs - which sums up to be BY FAR the largest item batch on EU's trade spread sheet.
Otherwise you will lose "the trade war" as quickly as Hitler's armies did when their fully functional tanks and armored artillery vehicles had to be abandoned in the Russian steppes . . . for the simple reason that they ran out of fuel.

Let us be serious here: no one in any big country knows a shit about an EC directive project. There are exceptions, such as the service directive some years ago (2005), but generally those are a matter of experts or lobbyists interested in the field, and publicity only increases after some discussion in the european parliament.
This draft will not help Sarkozy in any way. His campaign with a protectionist streak might, but this is not sure.

“Don’t tell me they are so rare because the French don’t like Italian wines”
How pathetic.
Does it not occur to Pumpernickel that unlike him we are not slaves to being “good ‘EU’-ropeans” and have it all shoved down our throats for his mad ideal ?
Nor do other Europeans nations share the guilt motor at the heart of German dedication to your “subsidiarity” nonsense – apparently the only people who do are your subsidy junkie fans such as some on this blog, and no one else.
The French do in fact appreciate Italian wines, but why on earth would they, who produce more than enough wines to satisfy most palates, bother to import more just to be slavishly good “EU”-ropeans?

the few bottles of italian wine on our shelves are for the german tourists that can't afford our wines, with their low wages and Hartz IV programs, no French would buy them, or so little, just to see how they are like !

Reciprocity in trade. Does this also apply to France Monsieur Barnier? How about opening the French train market to German competition like the German market is open to the French? Has anything happened in this respect, Marie Claude, since last we read about it a long time ago ….

And how about letting more Italian wines onto the shelves of French supermarkets. Don’t tell me they are so rare because the French don’t like Italian wines, often much better value for money. And Grappa … why is there no Grappa found anywhere in France when every even humble Germanz supermarket has them, even Lidl and Aldi, Marie Claude???

So before we start pointing fingers at the Chinese, fasst Euch an die eigene Nase, liebe Franzosen!

A trade war may the price that has to be paid to eliminate the severe trade imbalances that have endured for decades in some cases. In the abstract, trade wars are not "good", but in life all things must be judged in terms of the alternative, thus -

Is a lower level of balanced trade more desirable than a larger level of seriously unbalanced trade? IMO, yes.